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ASSET ACQUISITION

PROBLEM I

Tony Inc. acquires all of Jaramillo Co.’s assets and liabilities on January 1, 20x5. Tony incurs
the following costs for the acquisition:

50,000 shares of new Tony common stock, par value ₱4,000,000 Fair value of stock
₱2 per share, market value ₱80 per share, issued to issued
the former shareholders of Jaramillo
Registration fees connected with issuing the new 500,000 Cash payment
shares
Cash paid to former stockholders of Jaramillo: there 18,000,000 Cash payment
were 200,000 shares of Jaramillo outstanding, and
Tony agreed to pay ₱90 in cash for each share of
outstanding Jaramillo stock.
Consulting fees paid to Philippine brokers, in cash 1,100,000 Cash payment

The balance sheets of both companies immediately prior to the acquisition are as follows:

Tony, Inc. Jaramillo Co.


Book value Book value Fair value
Cash 25,000,000 90,000 90,000
Receivables 2,000,000 200,000 190,000
Inventories 20,000,000 8,110,000 7,000,000
Plant and equipment (net) 99,500,000 50,000,000 40,000,000
Trademarks 5,000,000 1,000,000 4,000,000
Total assets 151,500,000 59,400,000 51,280,000

Current liabilities 500,000 400,000 400,000


Long term liabilities 70,000,000 45,000,000 47,000,000
Common stock, par 2,000,000 1,000,000
APIC 55,000,000 10,000,000
Retained earnings 25,000,000 6,000,000
Treasury stock (1,000,000) (3,000,000)
Total liabilities and equity 151,500,000 59,400,000

In addition to the assets and liabilities already reported, Jaramillo has the following previously
unrecorded intangible assets that meet the requirements for capitalization: Brand names, ₱5
million, and Secret formulas, ₱7 million.

PROBLEM II

On December 31, 20x4, Pure Corporation enters into a business combination by acquiring the
assets and assumed the liabilities of Saint Corporation in which Saint Corporation will be
dissolved. Pure consideration transferred consists of the following:
a. 30,000 unissued shares of its ₱10 par ordinary shares, with a market value of ₱25 per
share.
b. ₱180,000 in long-term 8% notes payable, and
c. A contingent payment of ₱120,000 cash on January 1, 20x7, if the average income
during the 2-year period of 20x5-20x6 exceeds ₱300,000 per year. Pure estimates that
there is a 30% chance of probability that the ₱120,000 payment will be required.
In addition, Pure pays the following at the time of the merger:

• Finder’s fee, ₱12,000


• Accounting fees, ₱24,000
• Legal fees to arrange the business combination ₱42,000
• Cost of SEC registration, including accounting and legal fees ₱18,000
• Cost of printing and issuing stock certificates ₱14,400
• Indirect costs of combining, including allocated overhead and executive salaries ₱27,600
Balance sheet and fair value information for the two companies on December 31, 20x4,
immediately before the merger, is as follows:

Pure Saint
Book value Fair value Book value Fair value
Cash 276,000 276,000 24,000 24,000
Receivables - net 96,000 96,000 48,000 48,000
Inventories 288,000 360,000 120,000 72,000
Land 108,000 240,000 72,000 240,000
Buildings - net (10 year life) 480,000 720,000 240,000 360,000
Equipment - net (5 year life) 432,000 588,000 216,000 300,000
In-process research and
development - - - 60,000
Total Assets 1,680,000 2,280,000 720,000 1,104,000

Accounts payable 216,000 216,000 72,000 72,000


Other liabilities 240,000 216,000 144,000 168,000
Ordinary shares, ₱10 par 720,000 240,000
Additional paid-in capital 240,000 192,000
Retained earnings 264,000 72,000
Total Liabilities and Equity 1,680,000 720,000

Required:
1. On December 31, 20x4:
a. Determine the amount of goodwill
b. Prepare the entries required in the books of the acquirer (Pure) in relation to the
acquisition of Saint Corporation.
c. Prepare the balance sheet immediately after the business combination.
2. Assume that the value of the buildings was provisionally determined on December 31,
20x4. On August 1, 20x5, Pure Corporation received the final value from the
independent appraisal, the fair value at acquisition date being ₱384,000.
a. Determine the amount of goodwill.
b. Prepare the required entry to reflect the adjustment, if any.

3. Assume that on August 31, 20x5 because of improved information about facts and
circumstances that existed at the acquisition date, the contingent consideration was
revised to an expected value of ₱60,000.
a. Determine the amount of goodwill
b. Prepare the required entry to reflect the adjustment, if any
c. On November 1, 20x5, the probability value of the contingent consideration
amounted to ₱48,000:
i. Determine the amount of goodwill
ii. Prepare the required entry to reflect the adjustment, if any
iii. On December 15, 20x5, the expected value of the contingent
consideration amounted to ₱78,000:
1. Determine the amount of goodwill
2. Prepare the required entry to reflect the adjustment, if any
3. On January 1, 20x7, Saint’s average income in 20x5 is ₱324,000
and 20x6 is ₱312,000, which means that the target is met:
a. Determine the amount of goodwill
b. Prepare the required entry for settlement, if any

4. Assume instead that Saint Corporation’s additional consideration is contingent if it


generates cash flows from operations of ₱360,000 or more in 20x5. Saint estimates that
there is a 35% chance that the ₱120,000 will be required. Saint uses an interest rate of
4% to incorporate the time value of money.
a. Determine the amount of goodwill
b. Prepare the required entry to reflect the adjustment, if any
c. On December 31, 20x5, Saint Corporation’s cash flow from operations amounted
to ₱336,000, which means that it did not exceed the cash flows from operations
threshold of ₱360,000, therefore, there is no cash payment to be made to Saint
Corporation
i. Determine the amount of goodwill
ii. Prepare the required entry if the target event does not occur
5. Assume that instead of contingent payment of ₱120,000 cash. An additional cash
payment would be made on January 1, 20x7, equal to twice the amount by which
average annual earnings of Saint Corporation exceed ₱30,000 per year, prior to January
1, 20x7. As of acquisition date, it was forecasted that net income in 20x5 and 20x6 will
be ₱70,000 and ₱95,000.
a. Determine the amount of goodwill
b. Prepare the required entry as of acquisition date.
c. The actual net income was ₱78,000 in 20x5 and ₱84,000 in 20x6. What is the
entry to record the payment of the contingent consideration?
6. In addition to the stock issue, Pure Corporation also agreed to issue additional shares of
common stock to the former stockholders of Saint Corporation if the average post-
combination earnings over the next two years equalled or exceeded ₱390,000. The
additional 1,200 shares expected to be issued are valued at ₱18,000.
a. Determine the amount of goodwill
b. Prepare the entries required in the books of the acquirer in relation to the
acquisition of Saint Corporation
c. On January 1, 20x7, the target is met or contingent event happens, average
post-combination earnings over the next two years amounted to ₱492,000. What
is the journal entry to record the issuance of 1,200 additional shares?

7. In addition to the stock issue, Pure Corporation agreed to issue 6,000 additional shares
if the average income during the 2-year period off 20x5-20x6 exceeded ₱96,000 per
year. On January 1, 20x7, the average income amounted to ₱132,000 (the contingent
event occurs). What is the journal entry to record the issuance of 6,000 additional
shares?

8. In addition to the stock issue, Pure Corporation agreed to issue additional shares on
January 1, 20x7, to compensate for any fall in the value of Pure common stock below
₱25 per share. The settlement would be to cure the deficiency by issuing added shares
based on their fair value on January 1, 20x7, was ₱20. On January 1, 20x7, the
contingent event happens since the fair value per share fall below ₱25. What is the
journal entry record the issuance of 7,500 additional shares?

9. In addition to the stock issue, Pure Corporation agreed to a payment of sufficient share
of Pure Corporation common stock to ensure a total value of ₱750,000 if the fair value
per share is less than ₱25 on December 31, 20x5. Pure estimates that there is a 40%
probability that the 30,000 shares issued will have a market value of ₱510,000 on
December 31, 20x5, and a 60% probability that the market value of the 30,000 shares
will exceed ₱750,000. Pure uses an interest rate of 4% to incorporate the time value of
money. On December 31, 20x5, the contingent event occurs, wherein Pure’s stock price
had fallen to ₱20, thus requiring Pure to issue additional shares of stock to the former
owners of Saint Corporation. What is the journal entry to record the issuance of
additional shares?

PROBLEM III

ABC Company acquired XYZ Company on December 31, 20x5. The consideration paid by ABC
to the former owners of XYZ amounted to ₱700,000 cash. The pre-combination balances in
XYZ’s statement of financial position are as follows:

Book Fair
value value
Cash ₱10,000 ₱10,000
Accounts receivable 20,000 24,000
Inventories 72,000 57,600
Book Fair
value value
Land 500,000 600,000
Building 250,000 237,500
Goodwill 150,000
Current liabilities 30,000 27,000
Noncurrent liabilities 150,000 165,000

The tax base of each account is as follows:


Accounts receivable ₱22,000
Inventories 72,000
Land 500,000
Building 225,000
Current liabilities 27,000
Noncurrent liabilities 157,500

Assume a 32% tax rate.


Required:
(a) Prepare the acquisition analysis
(b) Prepare the journal entry in the books of the acquirer